Question

5 The WACC is the overall return the firm must earn on its existing assets to...

5 The WACC is the overall return the firm must earn on its existing assets to maintain the value of its stock.

True / False

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Answer #1

Answer

The given Statement is TRUE.

EXPLANATION

  • The Valuation of Stocks basically Depends on What Firm is Actually Earning .

?

  • For Working & Capital Expansions , Firms uses Borrowed Funds for which it has to pay the Cost of Raising such funds (we call it cost of capital)

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  • So Suppose WACC of firm comes to 10%, it means that its has to Earn ATLEAST 10% to maintain its Value because if Firm is not able to recover its Cost then Investors will start Exiting from such Stock which will lead to FALL IN STOCK PRICES.?
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